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Damaged goods

Date:05 October 2017
Marco Haan
Marco Haan

In my Industrial Organization lectures, I like to talk about Damaged Goods, the now classic article by Deneckere and McAfee. What’s it about? In 1990, IBM introduced a cheaper version of its laser printer. Fifty percent slower, but much cheaper. However, the American PC Magazine discovered that the two printers were identical. The only difference was that they’d built a few extra chips into the cheaper printer to make it slower. So the manufacturer had intentionally damaged its product in order to sell it more cheaply.

It's not actually as strange as it sounds. The move enabled IBM to tap into a new, low end of the market, while the slowness of the cheaper version made it unattractive to the higher end. A classic case of second-degree price discrimination.

Another of my personal favourites comes from an article by McAfee. At the time it was written, Sharp was selling two DVD players in the USA. The cheaper version would only play DVDs with the American NTSC standard (480 lines), while the expensive version could also play the European PAL standard (576 lines). The only difference between the two devices was the remote control. The cheaper version had a piece of plastic obscuring the button that would switch it to PAL. If you prised it off with a knife, the button appeared and you had a fully functioning expensive model.

Back to today. Tesla sells two models of electric cars: a 60kWh version and a 75kWh version. You probably know what's coming. Both models have exactly the same battery, but the capacity of the 60kWh model is limited by the software. This was made painfully obvious recently, when everyone in Florida who needed to evacuate with a 60kWh Tesla suddenly turned out to have a capacity of 75kWh. Apparently, Tesla can even control this remotely. Read the first report here and a more detailed analysis here.

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